15 years after 2008, developed countries still making mistakes

Source: The post is based on the article “Sajjid Z Chinoy writes: 15 years after 2008, developed countries still making mistakes” published in “The Indian express” on 8th August 2023.

Syllabus: GS3- Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment. & Effects of liberalisation on the economy,

News: In this article discusses the aftermath of the 2008 Financial Crisis and how policy responses deepened economic issues. Tight fiscal policy led to loss of monetary policy, causing more problems. Now, there’s a trend of countries turning protectionist, potentially harming global growth. The solution isn’t protectionism, but a coordinated global response, education, and improved domestic policies. The world needs a major conference, like Bretton Woods in 1944, to address these challenges.

What are the implications of the 2008 financial crisis on the world?

Globalization Impact: While globalization in the ’90s and 2000s boosted economies, it led to job losses in the West due to the “China shock”.

Fiscal Policy: Western countries tightened fiscal policy significantly after the crisis. This impacted their GDP growth: by 2018, GDP was 13% below pre-crisis trend in France, 17% in the US, and 22% in the UK.

Monetary Policy: Tight fiscal policies led to very loose monetary measures. Central banks increased their balance sheets, pushing long-term low interest rates.

Inequality and Economic Distortion: Loose monetary policy inflated asset prices, increasing inequality. It also kept unproductive “zombie firms” alive, stifling growth and innovation.

Protectionism: Economic challenges led to protectionist policies, like Brexit and the US-China trade war.

De-globalization Risks: Recent policies aim at bringing production back home, but this might reverse the gains from globalization. Such changes risk global economic division and could undo the benefits of globalization.

Bigger Current Threat: Technology and AI advances might replace many jobs, similar to how the “China shock” affected blue-collar jobs.

What should be done?

Coordinated Global Response: Countries should work together to address economic challenges, just as they did in the Bretton Woods Conference in 1944.

Education and Training: Equip workforces with skills to complement, not compete with, technology.

Support Creative Destruction: Encourage innovation and the phasing out of outdated practices, rather than preserving unproductive “zombie firms”.

Robust Safety Nets: Create systems to protect and support those adversely affected by economic changes.

Fair Tax System: Implement taxation that can finance the necessary changes and support the economy.

Avoid Protectionism: Instead of isolating economies, ensure that globalization’s gains are shared fairly.

Recognize AI’s Impact: Address the potential “ChatGPT shock” which might affect white-collar jobs, similar to how the “China shock” impacted blue-collar positions.

The focus should be on collaborative solutions, not counterproductive protectionist measures.

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